Tuesday, May 22, 2012

Wheat prices wake up after production concerns


The period of time when the world was sitting on mountains of wheat has lapsed. Although this was a big factor in smoothing price volatility, endings stocks are continuously been whittled down. And this leaves the market open to erratic price movements, when production concerns start bubbling to the surface. The market after reaching contract lows was bound for a correction, but the 100c weekly rally left everyone a bit surprised. After this months USDA report, prospects for wheat couldn’t be more bearish (lead by a bumper US crop). But a continuing hot weather bias in Russia/Kazakhstan, downgraded crops in the EU, lingering dryness in US and Australia and a falling Aussie dollar can change the market in a week.  After languishing around $230 ($250 WA) port all year, new season APW prices surged $30 to reach contract highs today.

Up until last week, it was thought the North American growing season has had a dream run, there was nothing but talk of excellent yield potential across most of southern Plains. But after four consecutive weekly crop condition reports showed some downside for the Kansas crop, the trade would start to wake up to the fact the Central Plains HRW crop is limping into the finish with heat sapping yield potential. However the late-season hot, dry conditions should build protein content. Whilst on both sides of the 51st parallel, spring wheat in the northern US Plains and Canadian Prairies are being planted at a rapid pace, with good moisture and no ‘current’ weather scares this early in the growing season to dampen prices.

In the FSU, a massive ridge of high pressure continues to block rainfall from central and southern Russia. Chances of a Sukhovey, the infamous hot wind that blows from the eastern steppes of Kazakhstan, which helped slash Russian grain production two years ago was first mentioned this week. Southern Russian wheat regions (28% of output) have been dry for April and now May, with the dry conditions now expanding into Central Volga District, Siberia and Kazakhstan. The recent warmer weather and low humidity has exacerbated the problem, with no relief at least for the next two weeks. Although it is still very early days, and weather forecasts change every day, a production loss of even 5-10mmt would be important.

The wheat forecast for the EU has had three monthly declines; with the current forecast at a five year low of 122.7mmt, while major concerns are surfacing in the Former Soviet Union.  The FSU (in particular Russia, Ukraine and Kazakhstan) is an important producer of cheap wheat; a downward bias on production will further shift export potential. Ukraine’s winter and spring wheat crop is already forecast at half of last years at 11mmt, combined with lingering concerns about the Russian crop sees Black Sea exports easing into 12/13. Russki wheat exports are forecast at 14mmt (-6.5mmt from 11/12), as stocks have been whittled down after this seasons bumper export program.  The lack of old crop supplies in the FSU will soon become apparent with little or no offers from the trade and growers not willing sellers if conditions persist to be dry. The trade will be reluctant to sell short so this will prop up markets.  The US is the only country with adequate old crop stock (Australian shipping stem is already over allocated for 2012), what could transpire is the US will be the number one port of origin for quality wheat for the remainder of this year.

Back home, as growers chased disappearing topsoil moisture, sowing basically came to a standstill. Their prayers will be answered with drenching rain for Thursday through to Saturday. Greater intensity is forecast for NSW and QLD (40 – 70mm), while VIC and SA should get 15 – 25mm.  This would be perfect timing, and in lieu of strong subsoil moisture in some regions will set the crop up well for the spring. But with the previous two-month dry period, yields will just be maintained. WA on the other hand is facing a different scenario. With temperatures 5˚C above average, and forecast dry for the next two weeks, planting window will be rapidly closing in northern regions.

With so many production balls in the air, price volatility will continue epically in the current weather market. It would be a foolish man who even attempt what prices may be at harvest. Especially with the overhang of the EU financial crisis, how low can our dollar go? It has already declined 11c from the Feb high. But one thing that has to be watched is the US corn crop. The historically tight US corn balance sheet was a large component of inflating wheat prices last year in the face of mountains of wheat stocks. Australia’s’ wheat exports tripling to Philippines at the expense of US corn an example. But if US production defies all expectations and bounces back to the forecast monster crop of 376mmt, it will change the entire feed grains S&D fundamentals quite dramatically next season muscling in on wheat market share and pressuring wheat prices sharply lower.

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